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Positive open expected after strong US finish

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European markets got off to a lacklustre start to the week yesterday, pulling off their lows of the day, but still finishing down, after the IMF followed the World Bank on Monday in downgrading its outlook for the global economy. The IMF reduced its global GDP outlook to 3.6%, from 4.4%, while upgrading its inflation outlook to 5.7% in advanced economies.

The war in Ukraine is expected to impact the eurozone quite heavily, with the IMF reducing its 2022 outlook here to 2.8%, from 3.9%, with Germany taking the biggest hit. The outlook for the US was much more positive, with its GDP estimate cut by 0.3% to 3.7%, while the UK has been cut from 4.7% to 3.7%, while for 2023 GDP growth is expected to weaken further, to 1.2%.

The IMF went on to warn of a permanent fragmentation of the world economy into geopolitical blocks, with China and Russia on one side, and western economies on the other. These concerns seem somewhat overstated in the medium term, given the lack of a credible or sustainable reserve currency environment which China or Russia could use to expedite trade with the rest of the world.

Yields saw an upward jolt on the back of increasing inflation concerns, as well as an expectation that the US economy may well be able to ride out the worst of the economic hit to its economy, after the IMF only downgraded the US economy by 0 3% to 3.7%.

While yields continued to move higher, US stock markets also looked resilient, buoyed by the relatively modest downgrade by the IMF, with the Nasdaq leading the gainers, as a both Charles Evans of the Chicago Fed and the Atlanta Fed’s Raphael Bostic expressed belief in the ability of the US economy to stand on its own, even when rates are rising. This strong finish looks set to translate into a similarly positive European open.

The US dollar also put in its third successive daily gain against a basket of currencies, rising to a new 20-year high against the Japanese yen. This yen weakness is likely to deliver a huge inflationary impulse into the Japanese economy in the coming months, with the risk that the Bank of Japan is underestimating the wave that is coming its way.

Japanese CPI is currently at a lowly 0.9%, and has only ever been above the Bank of Japan’s 2% inflation target for a brief 11-month period between April 2014 and March 2015, when it peaked at 3.7%, in the last 14 years.

While US yields jumped higher, crude oil prices continued to trade in a choppy range, sliding back sharply on concerns over demand after the release of the IMF’s gloomy World Economic Outlook, and demand concerns out of China.    

EUR/USD – currently languishing below the 1.0830 area, with the potential to slide back towards the March 2020 lows at 1 0635. We need to see a recovery back above 1.0840 to stabilise and signal a move back to the 1.0930 area.

GBP/USD – still holding above the recent lows at 1.2970/80 but the lack of rebound keeps the prospect of a move towards 1.2800. A break below 1.2950 argues for a move towards 1.2800. We need to move above the 1.3150 area to stabilise.

EUR/GBP – found support above the 0.8250 area last week but need to get above the 0.8320/30 area to retarget the 0.8380 area. Bias remains for a move lower towards the 0.8200 area and March lows, while below 0.8330. 

USD/JPY – seen further gains yesterday as we look to close in on the 130.00 area. The main support lies all the way back down near the 124.70/80 area, but while above that the bias is for further upside, towards 130.00 as well as the 2002 peaks at 135.00.

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